Top 3 Retiree Tax Mistakes

Tax planning is different after retirement. You might think that a lower income level and fewer deductions will lead to a care-free tax season. Unfortunately, taxes are just as unforgiving in retirement as they are pre-retirement.

You need to understand how retirement benefits and investment returns are impacted by federal and state laws.

Prevent Top 3 Retiree Tax Mistakes
According an article in Kiplinger, “3 Tax-Planning Mistakes Retirees Too Often Make,” these are the three most common mistakes:

Tax Loss Harvesting
Tax loss selling means selling a capital asset, like a stock, for a loss to offset a gain realized by the sale of other investments. The result is that the investor avoids paying capital gains on recently sold investments. Retirees with stock holdings should review their holdings every year to determine their market exposure and any tax consequences of selling stocks with substantial capital gains.

Unfortunately, the tax code isn’t very beneficial to stock losses. Stock losses can be used to offset gains. However, if you have excess losses over gains, you can only take an extra $3,000 annually to offset other income. If your loss is more than $3,000, you can carry it forward into future years. If your loss is big, you could be waiting some time to realize the full advantage of this. Work with a CPA or a tax professional on a fully maximized tax strategy.

As Kenny Rogers says, “you’ve got to know when to hold ‘em”

Too Small Income DistributionsWhile many experts work on how to limit required minimum distributions (RMDs), there are some good reasons for taking larger distributions. With a lower income, retirees may discover they’re in a lower tax bracket and they want to minimize their tax burden. However, they don’t see what can happen when they die: the money in their IRAs get passed on to their beneficiaries as an inherited IRA. Alternatively, the recipients can elect to take a complete distribution of the IRA and get hit with income tax on the whole thing! New tax laws may get rid of some of this burden, so stay tuned for updates from us!

Taxes on Social Security
It’s not uncommon for people to think that Social Security isn’t taxable. Unfortunately, the IRS is out to get retirees as well. Here’s how it works:

Retirees with minimal income won’t pay federal taxes on their benefits, but if they have additional income, there will be a percentage that’s taxable. Minimal usually means under $25,000.00 in a year.

If the income is less than $25,000 for single filers or $32,000 for joint filers, your benefits are all tax-free.

If the provisional income is between $25,000 and $34,000 as a single filer or between $32,000 and $44,000 as a joint filer, you’re taxed on up to 50% of your Social Security benefits. But if your provisional income exceeds $34,000 as a single filer or $44,000 as a joint filer, you’ll be taxed on up to 85% of your benefits.

To protect your retirement income and savings, every year should begin with a review of taxable income to see how it will impact your Social Security benefits. That includes evaluating your tax bracket.

Talk With an Expert
As a good start for 2019, we recommend you talk with a financial planner or CPA about your retirement tax outlook.

If we can help you with creating trusts, updating your will, or other legal tools to better plan for your retirement and take care of your loved ones, give us a call at 817-638-9016 to schedule an appointment. Happy New Year!

The Weaver Law Team

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